I mentioned one of my goals for 2015 was Net Worth based, so just how do you calculate your Net Worth? It’s really just your assets less your liabilities…simple right?
There’s no one way to calculate it, here’s how I look at it.
At a high level
I look at the NW calculation in the same way as a company balance sheet, a Mr&Mrs Zombie Ltd (privately owned obviously) if you will.
At the top I have my long term assets (pension fund, property, share options) followed by my short term assets in order of decreasing liquidity (cash, savings accounts, ISAs etc).
Then I have my short term liabilities (credit card). The net of my short term assets and liabilities is my Net Current Assets. You definitely want this to be positive, I like to think of this as my current liquid funds, rather than just my current account. Liquid in the case of an emergency. You probably want this more than 3 months of living expenses to be safe, but as you creep towards a years worth it is getting excessive. Net Current Assets seem to me a good way of keeping track of this.
And finally the long term liabilities (normally just your outstanding mortgage if you have one).
I actually have a reserves section at the bottom, just like a balance sheet 🙂 Haha, I’m so sad.
What assets to include?
Depends on the point of your Net Worth calculation. As I am using mine to track my progress towards FI I keep it restricted to my residential property and cash/investments. I can’t see the point of adding my car, TV, clothes, ornaments, Xbox etc to this. Might be nice to see a boost in your NW but I don’t think it’s applicable here. If I sell them, then so be it, they have by passed my system and made it onto the prestigious Mr&MrsZombie Ltd balance sheet as cash.
I include my share options at cost, pretty pessimistic when they are ‘in the money’? I could use Black-Scholes (or some other option valuation technique) to assign a value but as I can’t trade them, they won’t vest for another few years yet and I can only take the cash value before they vest it seems pointless. Valuing them will just add value that I can’t touch for another couple of years yet.
Should you include future earning potential on here? No. (Even if you did, surely you would need some kind of deferred liability to set it off against, which seems like a lot of work for £0 increase to your NW:)
Should you include your home in your Net Worth?
A mortgage represents a huge liability for a big proportion of us and so it seems this should be included. And paying off your mortgage is a huge step towards FI. But if we include this then we should include the asset that it is secured against, your home.
But how to include your property? We could include it at cost, i.e. the value we paid for it. Or we could try to include it at Market Value (this term is used loosely as it’s going to some estimate, say the value per Zoopla).
I can’t decide so I to do two NW calculations each week, one with my property and one without. With the property lets me keep tabs on paying off the mortgage and having some kind of idea what it might be worth if we were to sell it.
I look at the NW calculation without the property as my progress towards FI. My FI calculations assume the mortgage is already paid off and so any income needed to live off wouldn’t have to go towards any mortgage payments. If the property was generating an income (if we had lodgers) or a mansion and we planned to downsize and release some equity that would be different, sadly it’s far too modest for that. Much smaller and we would be living in a bin.
I would include investment properties at market value, but I don’t have any…yet
So what does it look like
+ Long Term Assets (Pension fund, share options, residential property if you want to include it)
+Short Term Assets (Cash and other liquid funds)
– Short Term Liabilities (Credit card, other short term loans if applicable)
STA – STL = Net Current Assets (liquid funds)
– Long Term Liabilities (Mortgage)
= Your Net Assets (your Net Worth)
A positive net worth is good 🙂 A negative net worth is bad 🙁
Just keep it simple and keep tracking it! Anyone do it any different?
Spend less, save more, escape the Horde.